Structural and Return Characteristics Of Mid-Capitalization Firms: A Study Into The Myth Around The Superior Returns Of Mid-Size Stocks
Date of Award
Executive Doctorate in Business (EDB)
Dr. Wesley Johnston
Dr. Conrad Ciccotello
Dr. Craig Ruff
Over the years there has been significant research around the misspecification of the Capital Asset Pricing Model (CAPM), which challenges the linear relationship between beta and market returns. One of the biggest challenges relates to the “small-firm effect,” which states there are two classifications of stocks (large and small) and that the companies with small-market capitalizations have higher returns. However, the definition of a small-cap is vague and there has been little focus in academia on the stocks in the middle-market capitalization deciles. Despite this, institutional and retail investors created the “mid-cap” category in the early 1990s and, since then, the risk-adjusted returns have been exceptional, relative to small- and large-cap stocks. This study examined mid-cap stocks from an academic perspective and delves into the “mid-cap myth” by evaluating the category over the past 85 years to answer the question around whether mid-caps are superior to other asset class. The results revealed that the highly touted and advertised mid-cap stock performance premium during the 1980-2013 time period was statistically insignificant. Moreover, mid-caps did have superior risk-adjusted returns over the extended time period studied (1928 to 2014); however, these superior returns relative to small-caps were not driven by the uniqueness of the mid-sized companies, but by the underperformance of small-cap stocks, specifically small-cap growth stocks. When studying the behavior or migration of mid-size companies, they do not appear to exhibit unusual behavior relative to companies with smaller market capitalizations, especially in the area of mergers and acquisitions. Thus, the question becomes why small-cap companies underperform relative to their risk level. The answer lies in the inclusion of the NASDAQ stocks to the CRSP database after 1972. This change not only doubled the number of stocks deemed small-caps, but also added a significant number of unprofitable fast-growing companies to the small-cap growth category, specifically in the technology and healthcare industries. The study benefits practitioners by providing insight into the omnipresent claim of mid-cap outperformance from 1980-2014, while also benefiting academia by providing more insight into small-caps’ underperformance during this period and how investigating small-cap growth companies further could add insight into the viability or magnitude of the size and value premium going forward.
Steinberger, Lane, "Structural and Return Characteristics Of Mid-Capitalization Firms: A Study Into The Myth Around The Superior Returns Of Mid-Size Stocks." Dissertation, Georgia State University, 2016.